FX market outlook

FX market outlook

Posted on Monday, November 20 2017 at 9:44 am GMT+0000

Euro drifts lower as German elections loom; dollar recovers despite tax risks

The euro was the worst performer among its major peers on Monday after German negotiations to form a coalition government broke down during the weekend. Consequently, the dollar index jumped on the news, but the yen might attract investors’ attention this week as the future of the US tax overhaul is still unclear.

The German Chancellor, Angela Merkel, failed to meet the second deadline to form a three-way coalition government during the weekend after the liberal FDP party announced on late Sunday that it would pull out from negotiations as the parties (CDU, FDP, Greens) could not find common solutions to key issues. Merkel, who is on her fourth term of leadership and whose Conservative party lost a majority in September’s federal elections, has now two options: either to form a coalition with the Greens or to leave the President Frank-Walter Steinmeier to call for new elections which could deteriorate her political position. Merkel announced on Monday that she would inform the president later on the day about the disappointing outcome.

Following the developments, the euro hit a one-week low at $1.1721 in early Asia before it inched up to $1.1748, being 0.40% down on the day. Euro/yen retreated by 0.48% to 131.60, reaching the lowest price since September, while euro/pound declined by 0.50% to a one-week low of 0.8873.

Despite political noise rising in Germany, investors remain optimistic about the common currency as recent economic data out of Eurozone appeared relatively strong, while the ECB’s plans to tighten monetary policy encourages euro investments.

In the absence of important economic releases, investors will keep a close eye on comments made by the ECB Chief, Mario Draghi in front of the European Parliament’s economic committee at 1400GMT. Speeches by the ECB Vice-president, Vitor Constancio, and the executive member, Sabine Lautenschlager, later in the day will also be in focus.

The dollar index bounced on the back of a weaker euro to 93.83, gaining 0.18% during the Asian trading hours. Moreover, a senior White House aide stating on Sunday that the US President would not insist to include a repealing key of the Obamacare health insurance in the tax overhaul provided some help to the greenback as this would somewhat uncomplicate decisions on tax reforms. However, the Senate which still debates the tax code will give a final announcement only after the Thanksgiving holiday.

Dollar/yen stood flat at 112.05.

In terms of data, Japanese trade figures released early on Monday missed expectations. Exports rose by 14.0% y/y in October compared to a growth of 15.8% expected, remaining near to September’s mark of 14.1%. Imports increased by 6.9 percentage points to 18.9% y/y but fell below the forecast of 20.2%. The trade surplus narrowed from 668 billion yen to 285 billion yen, missing projections of a surplus of 330 billion yen.

The pound climbed by 0.26% to $1.3244 after the EU called on the UK Prime Minister, Theresa May once again to move on the divorce bill until mid-December when EU leaders will gather to judge on the progress of Brexit talks.

In other currencies, the aussie and the kiwi posted moderate gains, helped by the rising gap between the local government bond yields and the US treasury yields. The kiwi was trading 0.23% higher at $0.6831 and the aussie reversed earlier losses, being flat at $0.7566.